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Chevron (CVX ) is being downgraded from 3.5 to 3.4. The stock was recommended as a Best Dividend Stock on April 11, 2014, at a price of $116.69 and has since paid a dividend of $1.07 eight times totaling $8.56. Its current price is $103, yielding slightly higher than 4%.

Here are two of the main reasons we have downgraded Chevron:

  • Earnings Growth – An abnormally high earnings expectation in the calendar year 2017. The FY 2016 EPS estimate is $1.41, while analyst estimates for FY 2017 are $4.53 (as of today), resulting in an abnormally high earnings growth estimate of more than 200%. This is not a typical characteristic for an income stock, which typically generate single-digit growth estimates.
  • Payout Ratio – The company is burning through cash at a rapid pace. Since 2012, the company’s available cash reserves have fallen from approximately $20 billion to roughly $11 billion. It needs approximately $8 billion of cash just to maintain its current payout ratio, which is higher than 200% based on the 2016 EPS estimate of $1.41. This is concerning in terms of potential CAPEX spending.

Income investors would continue to see dividends coming out of this stock but at the expense of expected high stock price volatility.

Our last two upgrades for 2016 are up 10.3% and 10.67%, respectively, excluding dividends. You can read a full analysis of these upgrades in our previous upgrades/downgrades below.

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